I learnt a few days ago that Singapore actually has its own stablecoin! It’s called the XSGD, backed by StraitsX, which was developed by Singapore-based fintech firm Xfers.
I wrote a fair bit about How “Stable” are Stablecoins earlier, and it’ll be interesting to analyze the stability of the XSGD as well.
As discussed in that article, I look at stability from 2 dimensions:
(a) How stable is the currency the stablecoin is pegged to?
(b) How strong is the peg?
How Stable is the Singapore Dollar (SGD)?
SGD is actually one of the most stable currencies in the world. This is driven mainly by the trade balance, which has been positive every single year since 19851. This means that Singapore exports more goods and services than it imports, which generates a strong demand for the Singapore Dollar.
Singapore Trade Balance 1960 – 20201
- Source: https://www.macrotrends.net/countries/SGP/singapore/trade-balance-deficit
Furthermore, Singapore is considered a safe haven for foreign investors. There are no natural disasters, it is politically stable, and it has one of the least corrupt and most transparent governance systems in the world. Many rich foreigners love to buy property here, so much so that the government has to impose a hefty 30% Additional Buyer’s Stamp Duty (ABSD) on foreign buyers of residential property to keep property prices affordable for Singaporeans.
Furthermore, the Singapore government has always been pro-business, and pro-investment. There are plenty of incentives for both start-ups and mature foreign companies to set up shop here.
Thus, Singapore also attracts a lot of foreign capital, further boosting demand for the Singapore Dollar.
In fact, the SGD is so strong that the Monetary Authority of Singapore (MAS, Singapore’s central bank) has to intervene regularly via open market operations to prevent the SGD from appreciating too quickly. That’s because Singapore’s economy is exports driven, so a strong currency makes our goods and services become more expensive to foreigners, which may reduce demand and affect our economy.
And when MAS intervenes in the markets, it sells SGD to increase its supply and buys US Dollars (USD), thereby lowering SGD’s value relative to USD. After decades of such open market operations, Singapore now has one of the biggest foreign reserves2 in the world, despite being one of the smallest countries.
10 Countries with the Biggest Forex Reserves2
2) Source: https://www.investopedia.com/articles/investing/033115/10-countries-biggest-forex-reserves.asp
This means that in the event of a George Soros-style short attack, MAS has more than USD 400 billion worth of reserves to defend its currency and maintain stability.
In any case, net exporter countries like Singapore which have a strong balance of payments and a currency that isn’t pegged at an unsustainably high level to another currency aren’t attractive targets for short attacks. Short attacks are best used on currencies that are pegged at unsustainable high values to another currency.
20 years ago, when I was a student in the USA, the USD/SGD exchange rate was 1.75. Now, it is less than 1.40. In that same time period, the Singapore dollar was also exchanging at about 2.2 Malaysian Ringgit (MYR), and today the rate is more than 3.0. The Singapore Dollar has been appreciating gradually, exactly as planned by MAS.
Thus, the Singapore Dollar is a very stable currency, which means the XSGD has passed the first criteria of stability as a stablecoin.
How Strong is the Peg?
The XSGD operates pretty much in the same way as USDC, which I have identified as the most stable of all USD stablecoins. For every token that is minted, one SGD of fiat money is deposited into a MAS-regulated financial institution account. For every token that is burned, one SGD is withdrawn from the account. Therefore, the ratio of XSGD in circulation is ALWAYS 100% the same as the number of fiat Singapore dollars held in reserves.
I also took a look at the composition of XSGD’s reserves.
As the reserves are all denominated in SGD, there is no risk of the reserves being devalued due to price fluctuations of the underlying assets. As you can see from the snapshot pulled from XSGD’s March 2022 Attestation Report, the amount of cash in reserves is matched 1:1 to the total amount of XSGD in circulation.
Furthermore, these are held as cash, which is 100% liquid and has a 0% risk of devaluing against itself. Contrast this with UST, which held most of its reserves in Bitcoin, and got into trouble when the value of Bitcoin fell drastically against USD. Also contrast this with USDT, which holds 25% of its reserves in commercial paper, exposing them to the risk of getting into a liquidity squeeze, forcing them to conduct a fire sale of these illiquid securities to raise cash in the event of a bank run.
Of course, the attestation report is only as credible as its auditor. One of the reasons why some people don’t trust USDT is because they chose a small practice in the Cayman Islands to be their auditor. XSGD, on the other hand, uses KK Yap & Associates, which is a chartered accountant* in Singapore.
(* chartered accountant according to the attestation report, but I have not been able to independently verify if it is true because the website of the Institute of Singapore Chartered Accountants is highly laggy when I try to do a member search).
So I would say the peg is about as strong as it can get because it is 100% backed by CASH reserves. Therefore, there is no risk of depositors losing their money due to either of the following:
a) Reserve assets devaluing against the SGD.
b) Reserve assets need to be sold at a discount because they are illiquid.
However, compared to USDC, XSGD has one drawback. USDC is open-sourced and therefore has little counter-party risk. XSGD, however, is controlled by StraitsX / Xfers. So if something bad happens to them, your XSGD may be at risk too.
The good news is that Xfers is a MAS-licensed financial institution, so the counterparty risk is less (but still exists).
Should I Invest in XSGD?
Based on the above reasons, I conclude that yes, XSGD is indeed a “stable” stablecoin. But does that mean it’s a good investment?
To begin with, stablecoins are pegged to fiat currencies, and therefore are good stores of value, but not good as investments. The upside of a stablecoin is the same as that of holding the fiat currency it is pegged to. In other words, not very exciting.
Stablecoins are only attractive as investments when other assets are devaluing relative to the currency. For example, if you feel that Bitcoin is going to fall in value, you may want to switch out to a stablecoin to preserve your buying power, before re-entering the market again in future to buy Bitcoin at a lower price.
Stablecoins are also used for their utility as a medium of exchange. For example, somebody in Pakistan contacted me today about a product he wants to be shipped to Pakistan. I don’t want to accept payment by credit card due to chargeback risk, and if he has to send money by telegraphic transfer, his bank will charge him an arm and a leg for the service.
I could actually set up an XSGD wallet for him to send the funds to. He wins because he doesn’t have to pay hefty transaction fees. And I win because I get to sell a product with no risk of not receiving payment.
In Conclusion
If you’re going to buy a stablecoin, buy it only if you have a specific use for it.
For Singaporeans buying from Singaporean businesses, there is little need for XSGD since we’re already enjoying free, instant fund transfers through services like PayNow.
But for Singapore businesses selling to both locals and foreigners, accepting XSGD can potentially help to generate more business.